John Stoltzfus, chief investment strategist at Oppenheimer, remains stubbornly bullish on stocks as many investors worry that the nine-year bull market may be derailed by geopolitical crises, peaking economic growth, inflationary pressures, and rising interest rates. Stoltzfus is sticking with his forecast that the S&P 500 Index (SPX) will end 2018 at a value of 3,000, which would be a 12.3% advance from the April 23 close, according to CNBC. The key drivers are “continued improved earnings, improved revenues, and an economy that shows sustainability at a level [of GDP growth] around 2.5 percent to perhaps better,” he said, per CNBC.
The major stock indexes on Tuesday largely ignored the quarter’s strong earnings performance thus far as companies such as Alphabet Inc. (GOOGL) said profits beat estimates but also reported rising expenses and shrinking margins. The S&P, Dow Jones Industrial Average (DJIA) and major tech indexes sold off.
This volatility reflects a key weakness in the market today. The bull market has lifted the value of the S&P 500 by 295%, as measured from the close on March 9, 2009 through the close on April 23, 2018. A significant part of this gain has been the result of soaring valuations. During this same period, the forward P/E ratio for the S&P 500 has risen from about 10 times earnings to 16.4 times, per Yardeni Reseach Inc. While this ratio has fallen from about 18.5 times earnings at the start of 2018, also per Yardeni, it remains in a historically high range, especially given risks that include tensions with North Korea and in the Middle East, trade conflict between the U.S. and China, and the prospect of interest rate hikes by the Federal Reserve.
Remarking in his CNBC interview that equities have shown “remarkable resilience,” Stoltzfus elaborated by saying, “Stocks have gotten through this period in relatively good shape considering we’ve had two separate 10 percent pullbacks with a short recovery space in between.” When asked about geopolitical concerns that have weighed on stock prices, such as trade tensions, he acknowledged that these are affecting investor sentiment. But Stoltzfus says this represents a temporary “interlude in the market.”
Once investors focus again on fundamentals such as earnings and revenues, Stoltzfus is confident that stock prices will resume their gains. In contrast to observers who feel that tax reform is rapidly becoming a spent force, he told CNBC that the legislation’s positive effects are still flowing into the economy. Stoltzfus spoke to CNBC after the close on April 20. Meanwhile, longtime bull Jeremy Siegel of The Wharton School is “pretty neutral” on stocks in 2018. (For more, see also: Market on Collision Course, Says Longtime Stock Bull.)
Warning: Stock Crash Ahead
On the other side of the ledger, a growing chorus of bearish prognosticators are calling for declines of up to 40% in stock prices. Among these have been Daniel Pinto, the co-chief operating officer (COO) of JPMorgan Chase & Co., Scott Minerd, the chief investment officer of Guggenheim Partners, and Mark Mobius, noted emerging markets fund manager. Investment manager John Hussman goes one better, predicting a brutal 60% nosedive, followed by years of negligible, if not negative, returns thereafter. (For more, see also: Contrarian Mark Mobius Sees a 30% Stock Plunge.)
Now joining this group is Rainer Michael Preiss, executive director at Taurus Wealth Advisors, in an April 24 appearance on CNBC. He predicts a stock market pullback in the range of 30% to 40%, driven by rising interest rates, but does not offer a timeline for it to occur. Rising rates, he notes, will reduce the relative attractiveness to equities to debt, while also increasing the cost of capital to corporations and possibly slowing economic growth as well. “It’s important to have a look at portfolio construction and potentially reduce passive ETF exposure,” he told CNBC. Mark Mobius is among those who also warn that panicked selling of passive ETFs is likely to exacerbate a steep market decline.